Full Transcript: Watts Water Technologies Q2 2026 Earnings Call

On Thursday, Watts Water Technologies (NYSE: WTS ) discussed second-quarter financial results during its earnings call. The full transcript is provided below. APIs provide real-time access to earnings call transcripts and financial data. Visit to learn more.

View the webcast at Summary Watts Water Technologies Inc. reported record sales, operating income, and earnings per share for Q2 2026, driven by a 12% increase in organic sales, particularly from data centers. The company is integrating five acquisitions from 2025, which are performing well and are on track to achieve targeted synergies, despite the Middle East conflict posing some challenges. Watts raised its full-year sales and margin outlook due to strong first-half performance and expects data center sales to represent a significant growth opportunity, with sales tripling year-over-year.

66. Challenges include inflation, higher commodity prices, and geopolitical uncertainties, though the company remains confident in its pricing strategy and cost management. Management emphasized the importance of data centers as a strategic growth area, with new product launches like CoolVault thermal storage tanks contributing to this expansion. Full Transcript OPERATOR Welcome to Watts Water Technologies Inc.

second quarter 2026 earnings call. At the end of the presentation, we will open the line for questions. I will now turn the call over to Ray Nash, Vice President, Investor Relations. Ray Nash, Vice President, Investor Relations Thank you, and good morning, everyone.

Welcome to our second quarter earnings conference call. Before we begin, I'd like to remind everyone that during this call we may be making certain comments that constitute forward-looking statements. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially. For information concerning these risks, see Watts Water Technologies' publicly available filings with the SEC.

The company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Today's webcast is accompanied by a presentation which can be found in the Investor Relations section of our website. We will reference this presentation throughout our prepared remarks. Any reference to non-GAAP financial information is reconciled in the appendix to the presentation.

With that, I will turn the call over to Bob. Robert Pagano Jr, President and CEO Thank you, Ray, and welcome to your first earnings call with Watts. Good morning, everyone. Please turn to Slide 3 and I'll provide an overview of the second quarter.

We delivered another quarter of better-than-expected results, including record sales, operating income, and earnings per share. I'd like to thank the entire Watts team for their dedication and contributions which made these results possible. Organic sales rose 12% in the quarter as we benefited from strong growth in data centers and favorable price as well as pull-forward demand, partly offset by our 80/20 rationalization program. Adjusted operating margin was 21%, down 60 basis points, primarily reflecting the anticipated dilution from recent acquisitions and a difficult comparison against the one-time price/cost benefit in the prior year that we discussed last quarter.

Even with those headwinds, margin performance was better than expected due to favorable price, volume leverage, and productivity. Our balance sheet remains strong and provides ample capacity to support our disciplined capital allocation strategy. This includes evaluating strategic M&A opportunities while continuing to invest in productivity, product innovation, and other key growth initiatives. Moving on to our business updates, we continue to make good progress integrating our recent acquisitions using the One Watts Performance System.

As a reminder, we completed five acquisitions in 2025 to expand our portfolio, strengthen our market reach, and increase exposure to non-residential markets. Overall, these businesses are performing well and we remain on track to achieve or exceed our targeted synergies. We have also continued to proactively manage the impact of the Middle East conflict on our business. While it created some headwinds during the quarter, our teams have responded with pricing, supply chain, and productivity initiatives to help mitigate both the direct and indirect impacts.

We're also pleased with the resilience of our newly acquired Saudi Cast business, as its in-country-for-country business model has limited the impact from the disruptions in the region. The tariff environment also remains fluid with new section 301 and 338 tariffs recently announced. These are in addition to the section 232 currently in effect and replace the section 122 tariffs which recently expired. Based on the tariff structures currently in place, we continue to believe we're well positioned from a price/cost standpoint.

Watts offers one of the industry's broadest portfolios of water solutions and, as we discussed before, approximately 60% of our sales come from repair and replacement activity. Together, these characteristics give us a strong foundation across different economic environments. As a result, while residential and non-institutional new construction markets remain challenged, we have continued to execute well and have been able to allocate resources towards high-growth market opportunities, including our Data Center Initiative.

We continue to see accelerated demand in data center cooling applications, and while data centers remain a relatively small part of our overall business today, we're encouraged by the momentum we're seeing. I'll provide more of an update on our data center initiatives in a few moments. We published our 2025 sustainability report in June. Our sustainability efforts continue to create value for both our customers and Watts.

We've made meaningful progress against our second generation of environmental goals while expanding innovative solutions that improve safety, water conservation, and energy efficiency. These efforts reinforce our commitment to solving our customers' most critical water challenges while supporting long-term growth. I'm proud of the progress our global teams have made and invite you to read more about it in the appendix of today's presentation or in our Sustainability Report which can be found on our Investor Relations website. Now an update on our outlook for the remainder of the year.

Due to our strong first half and our expectations for the third quarter, we are increasing our full-year sales and margin outlook. Data center growth, price realization, and performance in Europe and APMEA are all better than expected versus the outlook we provided in May. However, we do continue to see weakness in some of our macro indicators. Inflation measures and commodity prices are persistently higher compared to earlier this year.

In addition, the market outlook for interest rates has shifted with expectations of no further rate reductions throughout the rest of the year. These factors are compounded by continued uncertainty around trade policies and geopolitical disruptions, especially the ongoing Middle East conflict. As a result, we continue to expect softness in residential and non-institutional new construction markets. Please turn to Slide 4 for an update on our data center growth initiative.

In the second quarter, our data center sales more than tripled compared with the prior year, reflecting continued strong demand for our cooling solutions, including our recently launched CoolVault thermal storage tanks. Through the first six months of 2026, our data center sales represented 8% of total sales, including some of the pull-forwards I mentioned earlier, which Diane will discuss in more detail. We estimate our served addressable market is approximately $2 billion.

This is based on our view of the global market opportunity, including regions beyond China and North America, the double-digit growth rate of the market, and also the trend towards more liquid cooling solutions. As liquid cooling adoption continues to increase, we're also seeing greater content opportunities per megawatt than the traditional air-cooled systems. Because this is a project-based business, the timing and volume of sales will be more variable than in some of our other markets. This can have an impact on our quarterly outlook, as we saw with customer-driven pull-forward in Q2.

Our expanding global data center organization along with investments in new product launches have been paying off, and we feel confident in our ability to scale with our customers. We now expect data center sales for the full year to represent mid to high single digits as a percentage of overall company sales compared with just 3% of sales last year. We have been growing faster than the market based on our ability to serve our customers and deliver quality products while continuing to develop strong relationships with contractors, OEMs, and hyperscalers. Data centers continue to represent one of our most attractive growth opportunities.

With that, let me turn the call over to Diane who will address our second quarter results and our third quarter and full year outlook. Diane McClintock, Chief Financial Officer Diane, thank you, Bob, and good morning everyone. Please turn to Slide 5, which highlights our second quarter results. Sales increased to $763 million, reflecting a 19% increase on a reported basis and a 12% increase organically, both better than expected.

Growth was driven by price and volume, including the benefit of growth in data center sales and pull-forward sales from the third quarter, which more than offset the impact of our 80/20 rationalization initiative. The Americas region delivered strong organic growth of 12% and reported growth of 17%, both better than expected, driven mainly by price and volume, largely from data center sales.

The region also saw some pull-forward demand from wholesale customers of approximately $10 million ahead of our SAP implementation at the end of June at our largest site, as well as approximately $5 million of pull-forward of data center project sales which shipped earlier than planned. Our 80/20 product rationalization initiative resulted in a reduction of sales of approximately $8 million, or a 1% impact on organic growth. Acquisitions accounted for $28 million in sales, contributing 6 points to the Americas reported growth. In Europe, organic sales rose 9% while reported sales increased 12%.

Organic growth stemmed from favorable pricing and higher volumes, particularly in our HVAC business, while reported sales also benefited from positive foreign exchange. Our 80/20 product rationalization resulted in a decline of sales of roughly $1 million, or a 1-point impact on organic growth. In APMEA, organic sales grew 31% driven by an increase in data center sales in China, partly resulting from approximately $5 million of pull-forward of several data center projects which shipped early due to customer requirements, which more than offset the headwinds from the Middle East conflict.

Acquisitions added 17% and favorable foreign exchange contributed 9% for total reported sales growth of 57%. 1%, down 70 basis points year over year. Adjusted operating income of $160 million increased 15%, and adjusted operating margin decreased 60 basis points to 21%. The margin declines were primarily driven by the expected acquisition dilution of 70 basis points, the difficult comparison to the prior-year tariff-related price/cost benefit, and inflation.

This decline was partially offset by favorable price/volume leverage and productivity gains. 9%. 66, representing 18% year-over-year growth, with operational performance, acquisitions, tax, and foreign exchange driving the majority of the increase. 1%, favorable by 210 basis points compared to the second quarter of 2025, primarily due to a non-recurring tax benefit from the reversal of a prior-year tax liability.

Our free cash flow year to date was $98 million compared to $105 million in the same period last year. The cash flow decrease was primarily due to an increase in accounts receivable due to higher sales and our strategic investment in inventory. We expect seasonal sequential improvement in the second half of the year and are on track to achieve our full-year goal of free cash flow conversion greater than or equal to 90% of net income. As previously communicated, the balance sheet remains strong and provides us with good flexibility to execute on our capital allocation priorities.

4. On Slide 6, we'll review our outlook for the third quarter and full year 2026. As Bob mentioned, we are raising our full-year sales and margin outlook. This is based on a strong first half and our third quarter outlook.

This updated guidance assumes there is no change in the current status of the Middle East conflict. We are also assuming that there are no further changes to the tariff structure that is currently in place, and we are also not including any potential IEEPA tariff refunds in our outlook, and any refunds received in future periods will be treated as non-recurring special items and will therefore not be included in our adjusted results. We now anticipate organic sales growth of 8% to 11%, which reflects over a 5-point increase to the midpoint of our previous outlook.

Excluding the impact of our ongoing 80/20 product rationalization, our organic sales growth would be approximately 1 point higher. Our reported sales are now expected to be up 14% to 17%. Regionally, organic sales in the Americas are now expected to increase by 9% to 12% driven by price and volume, especially within data centers, more than offsetting anticipated 80/20 product rationalization headwinds of $25 to $26 million. In Europe, organic sales are now projected to increase by 1 point to 4 points as favorable price and volume are partly offset by $6 to $8 million in 80/20 product rationalization.

APMEA is now expected to achieve organic growth between 9% and 12%. Incremental sales from acquisitions are expected to be between $105 and $110 million in the Americas, a slight decline from our previous outlook as we begin to drive 80/20 actions in these businesses. We also expect between $21 and $22 million of acquired sales in APMEA. Foreign exchange is estimated to be an $18 million favorable impact.

We are raising our full-year adjusted EBITDA margin outlook to a range of up 20 to up 80 basis points, which is a 60-basis-point increase in the midpoint of our previous outlook. We are also raising our full-year adjusted operating margin expansion to a range of up 20 to up 80 basis points, which is 70 basis points higher than the midpoint of our previous outlook. Margin expansion continues to come from price/volume leverage and productivity, which more than offset higher inflation and 50 basis points of acquisition dilution.

Regionally, Americas segment margin is now anticipated to range from a decrease of 20 basis points to an increase of 40 basis points, largely overcoming approximately 100 basis points of acquisition dilution. Europe segment margin is now expected to increase 20 to 80 basis points based on strong price and productivity, which includes the expected benefits from our France restructuring program. APMEA's margin is forecasted to increase by 30 to 90 basis points. This guidance assumes no changes to the current tariff environment.

Our free cash flow expectation remains in line with our previous outlook, and we expect to deliver free cash flow conversion of greater than or equal to 90% of net income. Next, a few items to consider for the third quarter: reported sales are expected to increase by 11% to 14%, with organic sales up 5% to 8%. We anticipate high single-digit to low double-digit growth in the Americas, which is sequentially lower than the second quarter due to the pull-forward demand previously discussed and the sequential decline in price as we comp prior-year price increases.

We expect flat to low single-digit growth in Europe and mid- to high single-digit growth in APMEA, with our expected data center sales offsetting the impact of the Middle East conflict. These estimates incorporate the negative impact from product rationalization under our 80/20 initiative of approximately $2 million in Europe and $6 million in the Americas. Incremental sales from acquisitions are projected at $30 to $33 million for the Americas and around $5 to $6 million for APMEA. We also estimate an unfavorable foreign exchange impact of approximately $3 million.

8%. 4% across all regions. Price and volume leverage are anticipated to be partly offset by higher inflation and acquisition dilution of approximately 50 basis points. Additional key assumptions for the third quarter and full year are available in the appendix of the earnings presentation.

With that, I'll turn the call back over to Bob before moving to Q&A. Robert Pagano Jr, President and CEO Thanks, Diane. To wrap up, we delivered another strong quarter with record sales, operating income, and EPS.